THEOLDECONOMYRENAISSANCE：ISSUESANDOUTLOOK1206

1、december 5, 2012 the old economy renaissance commodities research 2013-2014 issues and outlook a renaissance, not an end with commodity supply constraints easing, chinese growth slowing and producer company returns normalizing, it is tempting to call an end to the commodity super cycle. however, we

2、believe that the current developments are simply the next phase of a commodity investment cycle that began in the late 1990s that will create new opportunities; we therefore view the current transition as a “renaissance” rather than an end. jeffrey currie (212) 357-6801 goldman, sachs however, this

3、does not preclude near-term market tightness. as economic growth improves into the latter half of 2013, we believe current fundamentals are likely to create near-term shortages, which will likely boost near-term prices relative to long-term prices, generating a positive carry in the forward curves.

4、this return of positive carry, or backwardation, will likely create significant investment returns despite our outlook for more stable long-term prices for key commodities. this dynamic is simply a return to the way commodity markets traded during the 1980s and 1990s, when long-term commodity prices

5、 were anchored around stable price levels $20/bbl for crude oil and $2000/mt for copper and all the price movements around these levels were driven by short-term demand fundamentals. in fact, the returns from commodity investments were larger during the 1980s and 1990s than during the past decade ow

6、ing to the negative carry that characterized the bull market of the 2000s (exhibit 1). driving our expectations for a return to more stable long-term prices has been increasing evidence of an improved outlook for long-term energy and metals supply, as the spare opec and western mining capacity that

7、drove commodity price stability at the end of the last century is now being replaced by shale technologies and chinese metals production capacity. as a result, we believe that $90/bbl oil is now the new $20/bbl and $7500/mt copper is now the new $2000/mt. exhibit 1: super-cycle returns not so super

8、due to negative carry total returns on s low near-term prices relative to long- term prices. this acted as a significant drag on investment returns to such an extreme degree that in 2006, despite a 4.5% rise in prices, investment returns were down by 8.8%. this contango in key energy and metals forw

9、ard curves was the result of anticipated future shortages, which pushed long-term prices above market clearing prices, which in turn reduced current demand and created near- term surpluses as long-dated prices dragged the whole forward curve, including goldman sachs global economics, commodities and

10、 strategy research 2) 3) 9 december 5, 2012global near-term prices, higher. in 2006, we labeled this dynamic “long-term shortages create near-term surpluses”, as it was a mechanism to incentivize the market to carry forward oil into what was expected to be a higher price environment. however, in rec

11、ent years, as concerns over long-term shortages have started to abate, this dynamic has started to disappear. instead, with a more stable long-term outlook for prices beginning to develop, contango is beginning to give way to backwardation in key commodity forward curves. going forward, as pressure

12、continues to build on long-term commodity prices, this dynamic will likely deepen, particularly in crude. the return of demand driven markets. as the markets move from being driven by long-term supply to being driven by near-term demand, inventory levels and current demand fundamentals will play an

13、increasingly large role in the determination of commodity price levels. specifically, we believe current fundamentals will remain tight for many key commodities, which is likely to support near-term prices relative to more stable long-term prices, reinforcing the backwardation in key commodity forwa

14、rd curves. further, we do not believe that the sun has set on emerging market commodity demand growth, which will continue to be a key driver of global commodity demand, contributing 1.65 million b/d yoy in 2013, which is nearly the same as it did in 2010. accordingly, we maintain a 3-month target o

15、f $115/bbl for brent and a 6-month target of $9000/mt for copper. to take advantage of this increasing carry in key commodity markets, we recommend opening an equally weighted position in gsci-style rolling front month indices in petroleum, corn and for base, copper less aluminium (commodity carry b

16、asket: crude, corn and base, or ccb). technology still constrained by policy. the inability to grow supply during the 2000s was primarily due to a combination of political and technological constraints. as there was always abundant supplies trapped by these constraints, the key uncertainty was the c

17、ost to supply the market in the long run. as political constraints trap conventional supplies, prices rise to the point that incentivizes investments in higher-cost technologies that unlocks non-conventional resources. over time it is not clear that these new technologies will remain high cost once

18、they are scaled up, which ironically creates a competitive threat to the development of future conventional resources. however, without significant global policy reform and infrastructure development, the same political and infrastructure constraints that restrict investment into conventional resour

19、ces will also limit the penetration of the new technologies in global energy and metals markets. longer- term, however, we believe that shale oil and gas will have a meaningful impact and the two developments that we believe will be important to watch are the development of chinese oil and gas shale

20、 reserves and the use of natural gas as a transportation fuel in the us. but neither development is likely to have a meaningful impact for at least another five years. goldman sachs global economics, commodities and strategy research 10 december 5, 2012 the old economy revenge evolves into the old e

21、conomy renaissance we argue that the “old economy revenge” has transitioned into an “old economy renaissance”, where massive capital expenditures have finally generated technology revolutions and supply responses across the commodity complex, which are easing old supply constraints. we have long arg

22、ued that the structural bull case for commodities was driven by supply constraints as opposed to demographic shifts and rising demand. in fact, to the contrary, in some of the most bullish markets like oil and copper, global trend demand growth actually slowed during the 2000s as the supply constrai

23、nts were so binding that only prices could rise to constrain demand growth. this suggests that a structural change would need to come from the supply side, not the demand side. these supply developments are just another phase of the larger investment cycle that we believe can be divided into the fol

24、lowing four phases which we have been discussing for the past decade. phase i (1990-1999): the “exploitation phase” was a period of significant spare capacity from the previous investment cycle which created structurally stable prices; however, the spare capacity kept prices at levels such that comm

25、odity producing companies could not earn their cost of capital. as a result, decades of poor returns in the oil, gas, metals and mining industries (the old economy) caused capital to be redirected into the new economy, starving the commodity industries of the capital they needed to expand capacity.

26、by 2000, the market had exhausted all the remaining spare production capacity that was mostly from investment in the 1970s and early 1980s, which in turn triggered the structural rise in commodity prices. phase ii (2000-2006): the “old economy revenge”. as we termed it in 2002, was accompanied by a

27、sharp rise in both prices and commodity company returns. although this stimulated significant investment, this investment hit bottlenecks that caused a significant rise in costs that slowed capacity expansion, leaving the market extremely short capacity as growth accelerated. as the industries start

28、ed spending, all they did was drive up costs, as resources, such as labor, steel and other inputs were in scarce supply. further, rising costs squeezed margins and started to put substantial upward pressure on long-term prices of all commodities. in 2006, fourth quartile oil producers were earning o

29、nly a 9.5% return on capital employed as costs had been the primary driver of the price rise. as oil reached $75/bbl with record highs across the commodity complex, the question became, why had the industries not seen a significant supply or demand response that would have otherwise created a new lo

30、ng-run equilibrium price? phase iii (2006-2011): the revenge of the old economy evolved into the “revenge of the old political economy”, where significant policy constraints on the free flow of capital, labor and technology were substantially constraining supply growth, regardless of the price or ex

31、pected return. some of the cost run-up in the previous phase was due to increased taxes by sovereign entities that were growing increasingly more aggressive. the worlds natural resources had not been controlled by so many individual political entities pursuing their own self interested protectionist

32、 policies since the 17th century, when mercantilism was the dominant political economy. the irony of this was that it is the revenge of the same old political economy that adam smith discouraged that was preventing his “invisible hand” to work in creating an adequate long- term supply response. phas

33、e iv (2011-present): the “old economy renaissance” is a result of politically driven constraints keeping commodity prices too high for too long such that investments into technology are beginning to resolve supply constraints across the commodity complex. given the political constraints on investmen

34、ts in key commodity producers, ironically, theses structural shifts in supply are coming from the key commodity consumers the us and china and in most cases are being driven by technological innovation. in the us it is energy and in china it is metals. despite concerns about slowing chinese demand,

35、china has grown supplies in markets like aluminum, zinc and nickel far faster than demand growth has slowed. and in the us, the shale revolution has not only impacted natural gas, but has now had a sizeable impact on crude oil. further, with rising supplies and more conservation reducing the need to

36、 carry strategic reserves, the us spr is increasingly becoming viewed as global spare capacity. while we believe this lessening of the supply constraints ends the upward trend in structural prices searching for a new equilibrium, it is still far too early to call for a structural bear market in comm

37、odities. goldman sachs global economics, commodities and strategy research global 11 december 5, 2012global increasing downside risks for gold in 2013. this stability in long-dated commodity prices also suggests that commodities will stop acting as a headwind on global growth and creating inflationa

38、ry pressures. clearly, it is far too early to call for a structural bear market, but commodities are likely to create a more positive environment for global growth. looking forward, our us economists forecast a further slowdown in the us economy in the first half of 2013 with an acceleration in the

39、us growth recovery in the second half of the year to return to trend levels. under this forecast, they expect an announcement of further expansion of the feds balance sheet at the upcoming december fomc meeting as well as more easing than consensus in 2014-2015. in the short term, the combination of

40、 more easing and weaker growth could prove supportive to gold prices although we believe that these catalysts are to a large extent already priced in by the gold market. medium term, the subsequent recovery in us growth points to a gradual increase in us real rates and as a result a decline in gold

41、prices. risks to this growth outlook remain elevated, especially given the uncertain outcome of the us fiscal cliff, which leaves calling the peak in gold prices a hazardous exercise. nonetheless, our modeling suggests the improving us growth outlook that our economists forecast outweighs their fore

42、cast of further fed balance sheet expansion and suggests that gold prices will likely reach their cycle peaks in 2013. net, we lower our gold price forecast and expect prices to reach $1,825/toz over the next 3 months before trending lower from mid-2013 to reach $1,600/toz by the end of 2014. for no

43、w, we expect this decline to be modest given our rates strategists forecast for an only gradual increase in real rates and the partly offsetting support of continued central bank gold purchases. with fewer catalysts for sharp moves to the upside and our view that downside risks will increase heading

44、 into 2013, we recommend that gold investors consider rolling a collar strategy, overwriting long gold positions with a covered call option and using the proceeds to fully finance the purchase of a put, protecting them from a potential decline in gold prices. this strategy is especially appealing in

45、 the current environment as the gold options market continues to exhibit relatively high call skew and low put skew for medium-term options. goldman sachs global economics, commodities and strategy research 12 december 5, 2012global diminishing supply constraints drive long-term price stability as k

46、ey commodity markets become more driven by near-term fundamentals as opposed to long-term supply constraints, the case for sustainably rising long-term commodity prices is undermined. specifically, for the past decade we have argued that the need to grow production capacity to overcome significant s

47、upply constraints, rather than demographic trends, drove the sustained rise in commodity prices. if the market was surprised by the demand growth, it should lead to a cyclical rise in near-dated prices (as occurred in base metals), while if it anticipated the demand growth, the market should have in

48、vested sufficiently to grow supply (as occurred in aluminum). further, if the market anticipated the demand growth and tried to sufficiently invest, but could not grow supply owing to bottlenecks, long-term prices rose due to cost inflation or the need for innovation, creating a structural rise in p

49、rices, as occurred in oil (exhibit 3). we have long said that demand drives these markets on a one to two year horizon while supply drives these markets on a two to ten year horizon. exhibit 3: reflecting the new equilibrium costs and long-dated prices have stabilized $/bbl 140.00 120.00 100.00 80.0

50、0 60.00 40.00 20.00 0.00 marginal cost is defined as the average of the highest cost (or bottom quartile) producers marginal costlong-dated oil prices source: nymex and gs energy equity research. the key is that this shift to a more structurally stable price outlook is entirely driven by supply-side

51、 events and, in particular, the ability of commodity industries to significantly increase output near current price levels. given the political constraints on investments in key commodity producing nations, these structural shifts in supply are coming from the key commodity consumers the united stat

52、es and china and in most cases are being driven by technological innovation. in the united states it is energy and in china it is metals (exhibits 4 total tax take (horizontal axis) 8,000 global 7,000 6,000 5,000 brazil china united states india 4,000 canada 3,000 australia indonesia 2,000venezuela

53、angola nigeria 1,000 0 united kingdom russian federation qatar norway malaysia libya iraq 40%50%60%70%80%90%100% overall tax rate source: bp statistical review, spears global oil demand growth (right axis); in % 6.004.00 2500 1500 500 -500 -1500 -2500 5.00 4.00 3.00 2.00 1.00 0.00 -1.00 -2.00 -3.00

54、3.00 2.00 1.00 0.00 -1.00 -2.00 -3.00 -4.00 -5.00 jan-08jul-08jan-09jul-09jan-10jul-10jan-11jul-11jan-12jul-12 global demandnon-opec supply gdp growth -1.5% the annual brent price changeworld demand source: iea and goldman sachs global ecs research.source: iea, ice and goldman sachs global ecs resea

55、rch. consequently, we expect the global crude market to remain cyclically tight over the next two years. further, we embed that some of the currently shut-in production in iran, sudan, syria and yemen as well as all remaining opec spare capacity will return or ramp-up in order to keep global invento

56、ries from dropping sharply, as we deem it highly unlikely that all shut-in production stays offline for another three years. however, with stronger global economic growth likely keeping the global oil balance in line with levels seen this year, we expect brent to remain in backwardation, with front-

57、month brent crude oil pricing at a substantial premium to its 5-year forward levels. consequently, we maintain our 2013 average price forecast of $110/bbl and introduce a 2014 forecast at $105.00/bbl, and continue to recommend a long position in the s the recent strong acceleration in infrastructure

58、 fai is also likely to support chinese gdp growth and power infrastructure related copper demand; chinese end user and semi-fabrictor de-stocking is ending; a policy and end to destocking driven pick-up in ex-chinese demand growth is expected in 1h2013 on the back of em monetary easing in particular

59、 following its second worst period of growth over the past decade; our economists expect further relaxation in the european risk premium following the activation of bond purchases by the ecb; we expect qe will likely be expanded at the december 11-12 fed meeting (please see our metal detector metals

60、, qe, and the slight pick-up in global momentum, published october 2 for details); while copper mine supply growth is expected to accelerate to an above-trend rate of 4.7% pa in 2013, from c.1% in 2012 (vs. trend c.2%), this is not expected to move the copper market into noticeable surplus until 201